One of the largest KiwiSaver providers wants the Government to consider scrapping the first-home withdrawal facility because it claims it is "incompatible" with long-term retirement savings.

More than 9000 people have withdrawn their contributions and those of their employer to buy a home after spending at least three years in the scheme. A savings umbrella group expects take-up to rise as more people, especially young people, become eligible.

Default provider AMP wants the Government to review the first-home scheme, saying homebuyers should only be able to withdraw any savings they have made above the minimum 2 per cent of salary. Government contributions, the minimum employee savings and employer contributions would remain locked away.

"The first-home withdrawal feature of the KiwiSaver scheme is incongruent with the concept of a long-term retirement savings vehicle," said AMP in a submission on the KiwiSaver default fund system to the Ministry of Business, Innovation and Employment.

The first-home withdrawal system is under the spotlight because the Government is considering how to deal with a proposal supported by Mercer, Onepath and Tower calling for all savers who join KiwiSaver but do not pick a fund to be automatically channelled into "life steps" funds.

Onepath says its research shows younger savers would be better off over a lifetime if they started in higher risk, share-heavy funds, when their balances were smaller and they still had time to recover from sharemarkets drops, than they would be sitting their whole lives in default conservative funds.

The proposal would move people who did not make a choice into more conservative options such as bonds and cash as they neared retirement and had more money and less time to recover from any losses.

AMP, ASB, Kiwibank, Westpac and the Commission for Financial Literacy and Retirement Income oppose the move, arguing variously that age is not the only determinant of someone's risk profile, that people have shown an appetite to stay in conservative funds, and that the Government risks being seen as culpable if it makes a decision for people ahead of a market plunge.

Westpac said people did not like or trust constant changes to the scheme, while ASB said 60 per cent of people in its default conservative fund had chosen to be there.

The first-home withdrawal would present a challenge if the Government decided to adopt a life steps approach as the default fund option, because young people who want to buy a home are on a short investment time frame relative to their ages.

The same issue would apply to any younger KiwiSaver members who unexpectedly needed a hardship withdrawal, or who became seriously ill.

Still, if the system is changed, Kiwibank and several other providers argue the design of the default system shouldn't be influenced by the first-home withdrawal facility. "The biggest intention of KiwiSaver is to provide a member with retirement savings - a first-home withdrawal is a facility that will only be used by a select few," Kiwibank said.

"If a member is intending to use their KiwiSaver funds to purchase a first home, then they should be actively engaged with their savings [not] relying on a default arrangement to invest their funds."

However, savings industry umbrella group Workplace Savings NZ said the default system should consider the needs of first-home buyers. While only 9300 members had used the first-home withdrawal facility by September 2012, "there is a strong likelihood of an increased incidence of first-home withdrawals over time".